From the NYT:
New research from TransUnion, a credit information service, suggests that the payment shock expected to hit millions of consumers with home equity lines over the next few years may not pose as much of a risk to lenders as feared.
The home equity lines of credit, known as Helocs, were originated before the housing market collapse when home values were still climbing. According to TransUnion, of the $474 billion in Heloc balances held by nearly 16 million consumers as of the end of 2013, nearly half of the loans were originated from 2005 to 2007, the peak year.
Many of these lines have a 10-year draw period, when borrowers may tap their credit and only make interest payments on the balance. As the draw periods come to an end starting next year, borrowers will have to begin paying both interest and principal on the outstanding balances. The TransUnion study estimates that more than half of the loans have balances of $100,000 or more.
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Times Topic: Mortgages
“The fear has been that this will push a lot of people beyond the limits of their liquidity,” said Ezra Becker, the vice president for research and consulting at TransUnion.
But the agency’s research suggests that fewer than 20 percent of balances are at significant risk of default. The total volume is likely between $50 billion and $79 billion.
“There’s clearly risk in the market,” Mr. Becker said. “But we’re not faced with an unknowable or immeasurable or nebulous fear.”
Concerned about the potential for another wave of defaults, the Office of the Comptroller of the Currency, which regulates banks, has been urging lenders to quantify their level of risk and reach out to borrowers ahead of time. Regulators are encouraging lenders to extend workout or modification programs to borrowers where feasible.
The most recent risk report from the comptroller says that active risk management by the nine largest regulated banks is beginning to reduce their Heloc exposure. For example, at just over $40 billion, the banks’ Heloc end-of-draw volume estimated for 2015 is roughly $10 billion less than estimated back in 2011.
“While improving, substantial challenges remain, and the O.C.C. will continue to monitor exposure levels and lender efforts to mitigate the risks,” the report said.